You do not have to own equities. It doesn’t make you dumb if your recent experience has you thinking that you would rather avoid the risk of equity ownership in the future.
You can make a financial plan work without them.
If you don’t want to own equities, it just means that you should use a lower lifetime rate of return assumption for your planning. But rate of return is just one assumption in your plan.
You have other options.
You can:
- Save more
- Retire later
- Spend less in retirement
- Leave less to your kids
(During a lighter moment in one of my presentations, someone pointed out that there is a 5th option: you could die earlier…)
The nice thing about these other levers is that they are things that you control. You have NO control over the return you will earn in equities, but you can control how much you spend, or when you retire, and making one of these adjustments can have a massive impact in the expected success of your plan.
So please realize that financial planning is NOT about trying to talk yourself into putting all your money into stocks and then dealing with the pain in down markets. It is about deciding which levers to pull and when.
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I agree completely…
Another approach which is particularly timely now is to consider cashflow producing real estate. With values down and still declining but interest rates low it is an unusually opportunistic time to lock in long-term positive cashflow investment property with fixed rate mortgages as an alternative to equities.
Assuming inflation ramps up on the tail end of this decline (highly probable) you can expect to have your rental income adjust with inflation while your largest expenses (mortgage interest) remain fixed. Additionally, real estate values serve as a leveraged play on inflation (once the current deflation completes its course).
Also, another approach is to figure out how to live happily on less. Using the “rule of 25″ or “4% rule” for every $1,000 less you need to live on reduces how much money you need to retire by roughly $300,000. Most people find it far easier to get creative and live happily on $2,000 per month less than to figure out how to surface an extra $600,000 in savings.
These are just two of many ideas that can be added to this discussion. The fact is equities, can be a great investment but your risk/reward is a function of valuation at the beginning of your holding period. Buy and hold does not offer an acceptable risk reward ratio over the long term ( as many are now learning).
Todd
But if you do place a portion of your net worth into equities, you do not have to face the pain of bear markets.
You know that option strategies (collars) can be used to protect the value of a portfolio – and still allow for growth. All at little, or no cost.
http://blog.mdwoptions.com/
But if you do place a portion of your net worth into equities, you do not have to face the pain of bear markets.
You know that option strategies (collars) can be used to protect the value of a portfolio – and still allow for growth. All at little, or no cost.
http://blog.mdwoptions.com/
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